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Volkswagen Corruption Trial Includes Seamy Testimony

BRAUNSCHWEIG, Germany — Rarely have so many top auto executives been summoned to talk about something other than cars.

On Tuesday, the former chief executive of Volkswagen, Bernd Pischetsrieder, and the chief executive of Audi, Rupert Stadler, reported to a courtroom in this northern German city to testify in a corruption case at Volkswagen involving charges of bribery, illicit sex and company-paid shopping sprees.

Both men told the court they knew nothing about the reported abuses, echoing the testimony last week of Volkswagen’s chairman, Ferdinand K. Piëch, who said he had no idea his company had set up a secret multimillion-dollar slush fund to pay off powerful employee representatives.

With its seamy details — a Volkswagen secretary testified that she had been ordered to rent an apartment for officials to use for romps with prostitutes — the scandal was bound to arouse prurient interest.

But by exposing the underside of German-style labor relations, it has struck a deep chord in Germany. Under a system known as co-determination, employees wield considerable influence in the boardroom through representatives who are guaranteed the same number of board seats as shareholders and who are paid like senior executives.

Nowhere is this system more entrenched than at Volkswagen, Germany’s largest carmaker, which is still partly owned by the state and has long been viewed as a bulwark of workers’ rights.

With German companies becoming more international, however, critics say the country’s labor practices will have to change. Porsche, which owns 31 percent of Volkswagen and is close to a takeover, plans to weaken the role of VW workers on the board of its new holding company.

“The Volkswagen story may be a wake-up call for other German companies,” said Michael Fichter, an expert in labor relations at the Free University of Berlin. “It points out the problems that can arise from employee representatives getting too cozy with management.”

At Volkswagen, these ties are said to have included payoffs, pleasure trips to Portugal and elsewhere, and sex; visits to prostitutes by Volkswagen employee representatives were common, as were gift certificates at expensive boutiques for wives.

Prosecutors say that Klaus Volkert, the former head of Volkswagen’s works council — the main representative body for employees — received more than 2.5 million euros ($3.7 million) in bonuses and other improper payments to buy his support for management policies. They are charging him with breach of trust.

Mr. Volkert denies demanding payoffs.

He is one of two defendants in the trial — along with Klaus-Joachim Gebauer, a former Volkswagen personnel executive — accused of setting up the system of blandishments. If convicted, Mr. Volkert faces up to 10 years in prison. Mr. Gebauer could get up to five years.

The scandal has already brought down one of Germany’s most prominent business figures, Peter Hartz, Volkswagen’s former personnel chief, who admitted he had steered quid pro quo bonuses to Mr. Volkert.

Photo

Bernd Pischetsrieder, the former chief executive of Volkswagen, at the start of the trial Tuesday.Credit
Ronny Hartmann/Agence France-Presse — Getty Images

Mr. Hartz, who helped compose and lent his name to a package of landmark economic reforms adopted by the previous German chancellor, Gerhard Schröder, received a two-year suspended sentence last year after a separate trial. He was fined 500,000 euros ($739,000).

Mr. Hartz’s trial seemed to draw a line under the scandal; he testified that he had acted without the knowledge of senior Volkswagen executives, like Mr. Piëch or Mr. Pischetsrieder.

Then German newspapers published a letter from a former Volkswagen employee to Mr. Piëch dated April 2003, warning him of improper payments to labor representatives. Volkswagen denied receiving the letter, but it drew the attention of prosecutors at the regional court here, not far from the company’s headquarters in Wolfsburg.

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So far, Germany’s big names have not dropped any bombshells. Mr. Piëch, who was chief executive from 1993 to 2002 before becoming chairman, said he was not aware of any improper arrangements. “If I had heard of such things,” he said last week, “I would have acted to stop them.”

Mr. Stadler, who served as the head of Mr. Piëch’s office at the time, said he did not recall a letter alerting his boss to problems. Nor, he said, did he know anything about an account, No. 1860, which financed overseas trips, shopping excursions in Paris and other perks.

A rising star in the auto industry, Mr. Stadler now runs Audi, the luxury carmaker owned by Volkswagen.

Mr. Pischetsrieder, who succeeded Mr. Piëch, said he first learned of the corrupt practices in June 2005, when one of the company’s suppliers alerted Volkswagen that Mr. Gebauer and another official had solicited a bribe. Mr. Pischetsrieder said he had consulted Mr. Hartz immediately. “Mr. Hartz was shocked,” he said, and agreed that the two should be dismissed.

But Mr. Volkert’s hefty paychecks did not initially raise red flags. Mr. Piech said he was too busy trying to save Volkswagen from a “catastrophic situation” in the 1990s to focus on such details.

Mr. Pischetsrieder said he was satisfied by Mr. Hartz’s argument that Mr. Volkert should be compensated like a senior manager at one of Volkswagen’s operating units. Such a person, he estimated, would be paid 250,000 euros to 600,000 euros a year, depending on performance.

Mr. Pischetsrieder left Volkswagen in 2006 after a clash with Mr. Piëch. But in court he sided with his former boss, saying Mr. Piëch was focused on the quality and cost of cars, not on labor relations.

In one respect, his testimony may have helped Mr. Volkert’s case.

Lawyers for Mr. Volkert contend that his conduct did not harm Volkswagen — a necessary condition for him to be convicted of breach of trust. On the contrary, the lawyers contend, Mr. Volkert was worth the money.

Mr. Pischetsrieder did testify that Mr. Volkert played a valuable role in overhauling the company’s labor practices, which Mr. Pischetsrieder said underpinned its turnaround. “There is no doubt that without Volkert, or a man like Volkert, Volkswagen’s restructuring in the 1990s could not have been achieved,” he said.

Though a verdict is not due until the end of March, Mr. Volkert’s lawyer, Johann Schwenn, had a spring in his step as he left the court Tuesday. “This was a good day for us,” he said.

A version of this article appears in print on , on Page C2 of the New York edition with the headline: Volkswagen Corruption Trial Includes Seamy Testimony. Order Reprints|Today's Paper|Subscribe